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Indian ULSD buying may have ebbed, but the effects of the country’s unexpected buying spree on diesel markets will reverberate for a few more months. Indian buyers have stepped back from the market, but for the Atlantic basin, the damage has been done. East of Suez refiners typically supply at least 20% of European ULSD imports, but these volumes will now not come as usual.

On the face of it, supplies are set to rise just as Indian buying has eased. Indeed, Asian refinery runs are set to grow in August, following a July that has seen planned outages push higher y/y by 0.5 mb/d, so values in the East should ebb from their highs. Similarly, runs in the Atlantic basin are currently close to maximum, and European supply should rise y/y in August as the prolonged works undertaken by German refineries are set to end.

But, depending on how long it takes Asian supplies to ramp up and replenish low inventories East of Suez, it may take until September for east-west flows to normalise, by which time European turnaround activity will have intensified to over 0.6 mb/d, before it pushes over 0.7 mb/d in October. Given that European diesel inventories typically peak in August, due to refineries operating at high rates and the softening of seasonal demand, this is a significant development. Stocks will probably build in August, but only modestly, which would help to deliver a significantly tighter Q4 17.

So the dry spell for Europe over July and August will ensure that plenty of ullage is on hand as supplies recover, implying that the market should be rangebound heading into September and October, especially if on-road diesel demand remains strong in Europe and emerges from the shadow of extraordinarily weak heating oil demand that plagued the first few months of 2017. Indeed, demand is growing more strongly than expected, with Indian demand boosted by infrastructure spending, Chinese demand rising on the back of coal production as lost hydro power boosts coal demand, and European ULSD demand growing on better industrial output.

As such, Asian diesel demand that was flat y/y in Q1 17 is expected to grow to almost 0.4 mb/d in Q2 17 and then accelerate further to 0.5 mb/d in Q3 17 thanks to an impressive recovery in Chinese demand after six quarters of contraction. Led by Asia, global demand growth is thus likely to come in at a thumping 0.66 mb/d in Q3 17 and 0.63 mb/d in Q4 17.

So, with global diesel demand growth likely to come in so strong, the global refining system’s ability to easily meet incremental demand for ULSD will continue to be tested, and with turnaround season not too far away, it is increasingly unlikely that spot supplies can recover fast enough to pull ULSD spreads significantly lower in Europe, even as the East weakens. Prices and spreads might slip a little bit as stocks rise in August, but builds will be lighter than normal as the imbalance in east-west flows is resolved. If autumn turnarounds come in heavier than currently expected, then the market will quickly start to look to winter demand and the potential for supplies to be tighter in Q4 17 than we might have expected just a few short weeks ago.